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The Week

Hear that hiss? That’s Toronto's condo market Add to ...

These are some of the top stories Report on Business followed this week.

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What new mortgage rules will mean
Canada's Finance Minister clearly doesn't like the look of the skyline of the country's biggest city.

Jim Flaherty cited Toronto's condominium boom this week as he unveiled new mortgage rules meant to temper consumer borrowing and take some of the heat out of the housing market.

True, Vancouver has been of concern, but of late it's Toronto that is causing such anxiety.

"In Toronto in particular, what I’ve observed and heard about from developers is continuous building without restriction," Mr. Flaherty said. "It’s distorting the market, quite frankly. And for that reason, we’re taking the steps we’re taking."

Mr. Flaherty moved on mortgages for the fourth time, cutting the maximum amortization for a government-insured mortgage to 25 years from 30 years. He also brought down the amount of equity homeowners can take out of their properties in a financing to 80 per cent from 85 per cent in changes that take effect July 9.

The Finance Minister did that in concert with the country's bank regulator, the Office of the Superintendent of Financial Institutions, which unveiled new, final guidelines simultaneously.

There are two things going on here. First, the debt burden of Canadian consumers has been growing, and is expected to continue, even as debt growth slows. That's because income growth is slowing faster, raising the ratio of debt to disposable income to 160 per cent, the same level that got the U.S. and Britain into trouble.

The second part are home prices that are getting out of hand in some regions, with overvaluation of up to 15 per cent by some calculations.

The impact of Mr. Flaherty's changes will, of course, take time, and could drive sales up in the short term as some buyers rush to beat the new rules.

Craig Alexander, the chief economist at Toronto-Dominion Bank, describing the new rules as prudent, figures that the combined move by Mr. Flaherty and OSFI could bring down house prices by five percentage points from where they would have been otherwise, all things being equal, though generally it takes about a year to filter through.

That's expected to hit the Toronto condo market, which, of course, is Mr. Flaherty's goal. Condos, Mr. Alexander noted, are frequently an entry point to real estate because of prices.

"First-time buyers are the greatest users of mortgage insurance, since they have had less time to save for the down payment," the TD economist said.

"If you put less than 20 per cent down, you are required to buy mortgage insurance. Moreover, the impact of lower housing demand will tend to hit the parts of the market where there have been the greatest excesses. Given the incredible building taking place, condos look more vulnerable to a price correction than single detached homes."

 

Global economy sparks anxiety
From Asia to Europe to North America, the global economy is taking it on the chin of late, and weak readings are sending ripples through the markets.

An ever bleaker picture emerged this week as policy makers at the Federal Reserve trimmed their projections for economic growth, and marked up their forecasts for unemployment.

"It is not surprising, with the global financial and economic backdrop, that stocks have sold off and commodity prices are falling," said chief economist Sherry Cooper of BMO Nesbitt Burns.

"Long-term U.S. and Canadian bond yields are dropping like a rock from already record-low levels. While the government efforts to prevent a housing bubble and to slow household debt are commendable, the global slowdown and substantial political and financial risks may jeopardize even a modest 2 per cent growth trajectory."

Like Ms. Cooper, other economists also see slower-than-expected growth in Canada, while in China, softer readings continue to make investors anxious.

In Europe, of course, some economies have collapsed and the debt crisis continues to spread. EU leaders will meet yet again next week, having failed repeatedly to gain any traction despite several bailouts.

"Investors this coming week will once again have their eyes on Europe, and the EU summit could see attention continue to shift to the larger troubled economies, including  Italy," said Peter Buchanan of CIBC World Markets.

"Even if Europe manages to muddle along for now, a less resilient Canadian economy and perils stateside means investors may not get the usual summertime rally."

 

Major banks downgraded
Moody's Investors Service took a swipe at the world biggest banks this week with a series of downgrades that included Royal Bank of Canada.

It's not so much the impact on the banks, but what the downgrade of 15 banks indicates. As market analyst Chris Beauchamp of IG Index put it, the move by Moody's "underlines how far from recovery the global financial sector really is."

Among those affected, to varying degrees, were Bank of America Corp., Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., HSBC Holdings PLC, JPMorgan Chase & Co., Morgan Stanley, Credit Agricole, Barclays Bank, Deutsche Bank, Société Générale, UBS and Royal Bank of Scotland.

RBC's long-term deposit rating fell to Aa3 from Aa1, but it and two others - HSBC and JPMorgan - are in a more stable group.

"Capital markets operations (and the associated risks) are significant for these firms," Moody's said of that particular group.

"However, these institutions have stronger  buffers, or 'shock absorbers,' than many of their peers in the form of earnings from other, generally more stable businesses. This, combined with their risk management through the financial crisis, has resulted in lower earnings volatility. Capital and structural liquidity are sound for this group, and their direct exposure to stressed European sovereigns and financial institutions is contained."

Analyst Peter Routledge of National Bank Financial doesn't see it as a big deal.

"RY now belongs to a smaller, more exclusive, group of three global banks rated in the Aa category; prior to the downgrade it was one of 10 in this category," he said of RBC, referring to the bank by its stock symbol.

"To the extent they use ratings in weighing counterparty risk, the chief risk officers of RY’s counterparties will, we believe, beneficially distinguish the bank from its peers even more than before today’s rating action ... Downgrade is a non-event for equity holders. While the downgrade is larger than expected, our view on RY remains unchanged. It has a premier domestic franchise and strong risk management. Over the long-term we expect the bank to deliver attractive returns to shareholders."

 

What to watch for next week
Suffering shareholders of Research In Motion Ltd. can expect another weak quarterly report Thursday. The BlackBerry maker has already said it expects to post an operating loss, which will be followed by a "challenging" performance for several more quarters.

On the economic front, Statistics Canada reports on how Canada's economy performed in April, and economists are expecting a so-so result.

"The Canadian economy likely expanded a modest 0.1 per cent in April, in line with the prior month," said economist Robert Kavcic of BMO Nesbitt Burns.

"Indicators painted a mixed picture in April, with wholesale volumes up sharply, housing starts strong and employment reeling off a second straight month of solid growth," he said in a report.

"But manufacturing and retail sales were red flags, with volumes in both sectors down for the third time in the latest four months. There are also some special factors to consider in April. In the resource sector, Potash Corp.’s temporary mine shutdowns came back online April 1, which should boost output, while oil and gas production looks to have rebounded after three straight monthly declines totalling 3.6 per cent. Utilities output was also down in the prior two months amid a mild winter, but those declines should be stemmed in April. One potential negative is the impact of the student protests in Quebec on education output - the sector contracted 0.8 per cent in March, and could weaken further as protests heated up in April."

EU leaders meet Thursday and Friday, but such summits have resulted in little in the past.

"As Galbraith said, 'meetings are indispensable when you don’t want to do anything," said strategists at RBC Dominion Securities.

"We are optimistic that such a low benchmark will be cleared, but ... the best we can realistically hope for is a road map with all the right elements and common (political) agreement on these. EU President Van Rompuy stated that such a blueprint would include discussions around eurobills, the European Redemption Fund proposal and a future banking union."

 

Required reading this week
Asia-Pacific has the largest number of wealthy citizens of any region in the world, a shift that underscores the tilting of global economic clout, Tavia Grant reports.

 

Sirius XM Canada wants to renegotiate the terms of its licence to save millions of dollars a year and put it on a more even footing with the traditional radio industry, Steve Ladurantaye writes.

 

General Motors of Canada Ltd. is in danger of breaking a production commitment it made to the federal and Ontario governments in 2009 in return for more than $10-billion in taxpayer financing, Greg Keenan reports.

 

Canada’s invitation to join the Trans-Pacific Partnership represents an entrée into what might become the world’s most important trade pact, Andy Hoffman and Jeremy Torobin report.

 

Europe doesn’t need a bazooka so much as a German chancellor who is willing to ease up on her principles, Eric Reguly writes from Rome.

 

 
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